Matching concept explained

Accounting concept is an important aspect in the preparation of financial statements. One of such is the matching concept. This is always applied in the preparation of the statement of profit or loss. This article explained it, along with their principles, and importance.

1. What's the matching concept in accounting

The matching concept is a principle which states that expenses of an entity should be matched accordingly with the income of a particular period. The term “period” is important when applying the matching principle. Only income and expenses relating to a particular period should be recognized in the income statement.

Also, all expenses whether actual or estimated must be reposted to the period to which they relate and not to a later time. The principle is in line with the accrual accounting basis. Therefore, the income recognized is not necessarily received by the entity. As long as they are earnings relating to the period they are included in the profit statement. In addition, expenses recorded are those incurred for the period in those statements.

2. Ten examples of the matching principle application to income statement

Now, we examine some examples of expenses and income to which we applied the matching principle.

2.1 Rent

Rent is usually paid in advance especially in Nigeria. For example, the rent expense for January to December, 2024 is paid in early January 2023. The matching principle forbids the total expense for rent to be accounted for in January 2024. Therefore, it must be spread from January to December. So that each month rent expenses match each monthly income derived from the location rented.

2.2 Depreciation

Items of property, plants, and equipment are used for more than a year. In fact, some PPE may be used for more than 10 years. To ensure that a portion of them are deducted from income earned in a particular period, depreciation expenses are calculated periodically. These are mere estimates.

2.3 Trade/service income

Income earned from a trade or service may not be received as cash in that month. For example, a trader might sell goods to a customer worth 50,000 Naira in March 2024. The customer may deferred payment to April 2024. The income earned must be accounted for in March, rather than April when it is received.

2.4 Other operating expenses

Also, certain administrative, distribution, and other expenses may not be paid immediately as they occur in the month of reporting. This should be accounted for in that month and not the month they are paid.

2.5 Impairment of trade receivables

Formerly known as provision for bad debts is another way in which the matching concept is applied in accounting and to financial reporting. As stated earlier, not all income earned is cash received from clients/customers. Therefore, those not paid for are regarded as trade payables.

In order to ensure that the income stated are properly matched with their relevant expenses, an estimate of the trade receivables which the business management believed that are impaired due to credit loss are charged to the profit or loss statement.

2.6 Interest on loans/lease

In certain cases, interest on loan or finance cost on lease agreement might be paid on a quarterly basis by the entity. To comply with the matching concept, the interest due for the month is recorded to that month.

3. Conclusion

To conclude, the matching principle helps preparers of the income statements prepare them accurately. Thereby ensuring that only relevant information is presented to users of those statements.